The economic modernisation of Myanmar continues at a rapid clip. In the critical sectors of telecommunications and banking, a combination of government and private sector efforts have set the foundation for the country’s next stage of growth. Nevertheless, significant challenges lie ahead.

Earlier this month Qatari telecom Ooredoo (ORDS:DSM), launched mobile phone and 3G internet services in greater Yangon, Mandalay and Naypyidaw. According to the company, the initial networks reach 7.8m people, about 15 per cent of the population. Norway’s Telenor (TEL:OSL) will open similar coverage in September.

The Myanmar government awarded both companies with nationwide telecom licenses last year following a highly competitive tender process that received widespread praise for its transparency. Meanwhile, state-owned enterprise (SOE) Myanmar Posts and Telecommunications (MPT) has announced a $2bn upgrade to its own mobile network, in partnership with Japan’s KDDI (9433:TYO) and backed by Sumitomo Corporation (8053:TYO).

The telecoms are bringing both mobile phone and internet services to many in Myanmar for the first time. The latter is especially significant as private internet access remains very uncommon: in a poll of urban Burmese conducted by Asean Confidential in late 2013, just 55 per cent of respondents answered that they regularly access the internet from home—despite the fact that the poll was conducted online. As millions of Burmese get connected, e-commerce and mobile banking will become more viable, to say nothing of the social and political implications of access to information and social networks.

Despite the significant progress, a long road lies ahead for the telecoms as they expand their networks to cover the rest of the Myanmar population. Many of the thousands of cellular towers needed to cover mainland Southeast Asia’s largest country will be built off the electricity grid, powered by diesel generators that require resupply and maintenance, in turn made difficult by a lack of roads.

An overlap of bureaucracies also slows the construction of new towers. For every tower, the contractor must acquire separate permission from the Ministry of Communications, Ministry of Construction, one or more regional and district authorities, and the landowner, any one of which can cause delays in a country without streamlined approval processes. In many cases, simply determining and tracking down the legal owner of the land can prove difficult.

Ooredoo and Telenor also face a potentially hostile regulatory environment because state-owned MPT, a direct competitor, doubles as regulator for the telecom sector. It is widely suspected that MPT has delayed certain approvals in order to slow the launch of the foreign telecom networks, buying itself time to catch up.

Short-term impact of foreign bank licenses limited

The Myanmar government will soon award between five and ten bank licences to foreign institutions, permitting them to begin limited wholesale banking activities. A first-round shortlist of 25 banks was released last month by the government, but this revealed little since only the 42 banks with local representative offices were eligible to apply.

Asean Confidential interviews with bank executives in Rangoon (Yangon) indicate that licenses will likely be awarded to banks from a range of countries, in an attempt by the government to balance commercial and political concerns. One (or possibly two) shortlisted banks from each of Japan, China, Singapore and Thailand will likely win, with any remaining licenses likely to go to the shortlisted Korean, Malaysian or Vietnamese banks. ANZ (ANZ:ASX), which has a strong presence elsewhere in South-east Asia, is the only western bank shortlisted and will almost certainly be offered a license.

Standard Chartered (SC) (STAN:LSE) was also widely expected to take a license, but withdrew from the process. Asean Confidential research indicates that the bank’s decision not to bid surprised even the Myanmar government, and may reflect objections to the process or to the limitations placed on the licenses. SC may also see an opportunity to enter the market through a JV or acquisition of minority stake in a local bank.

In contrast to its laissez-faire approach to the foreign telecoms, the Myanmar government aims to keep foreign banks on a tight leash. Only wholesale banking will be permitted, and winning banks will be allowed only to lend to foreign companies and local banks, forcing the foreign banks to partner with local institutions to serve local non-bank customers. The restrictions are aimed both to protect the local financial services sector and to encourage the transfer of knowledge and best practices by encouraging foreign-local cooperation.

Thus while the entrance of foreign banks represents an important step in modernising the Myanmar banking sector, tight restrictions placed on the licenses mean that the medium-term effects will be limited.

Dan Gallucci is a Bangkok-based researcher at Asean Confidential, a research service of the Financial Times